The dollar climbed to a nearly 2 1/2-year peak against the yen Friday after minutes from the Fed's December meeting the previous day showed growing concern about further stimulus for the economy, with speculation of more monetary easing in Japan also weighing on the Japanese currency.
Injecting stimulus into the economy involves flooding the market with dollars, which would tend to lower the currency's value. Any doubts about that stimulus are viewed as positive for the greenback.
The U.S. currency, however, erased its gains versus the euro after a key U.S. jobs report showed U.S. hiring eased slightly in December, which suggested the Fed may be in no rush to tighten monetary policy.
U.S. nonfarm payrolls grew by 155,000 last month, in line with analysts' expectations and falling short of the levels needed to bring down the country's unemployment rate, which remained at 7.8 percent.
The data came a day after minutes from the Fed's December meeting showed some policymakers were contemplating an end to their bond-buying program, also known as quantitative easing, as early as this year.
Richmond Fed President Jeffrey Lacker said Friday that the U.S. central bank's latest bond-buying plan threatens the central bank's credibility and raises the risk of future inflation. Lacker dissented at every Fed policy meeting last year.
"While the Federal Reserve is not expected to make a decision about ending QE3 for at least the next 4 to 6 months, the fact that they are even considering terminating QE3 in 2013 is, in our opinion, a game-changer for the U.S. dollar," said Kathy Lien, managing director, at BK Asset Management in New York.
The dollar rose as high as 88.40 yen, according to Reuters data, the highest since July 2010. It briefly pared gains after the jobs data before rallying again to last trade at 88.13 yen. Traders cited barriers at 88.50 and 89 yen.
The dollar posted gains of 2.7 percent this week, its largest weekly rise in more than a year.
The yen has struggled in recent weeks on expectations Japan's new government, led by Prime Minister Shinzo Abe, will push to weaken Japan's currency and force the Bank of Japan to implement aggressive monetary stimulus to beat deflation.
Analysts said the dollar's break above the 88-yen level is significant, with some expecting yen weakness to continue.
"The recent bullish trend (in dollar/yen) ... remains intact, suggesting an intraday pullback later today or early next week could still present a strong buying opportunity," said Matthew Weller, currency strategist with GFT in Jersey City.
"The confluence of trend line support and previous-resistance-turned-support around 87.40 should put a floor under rates, giving traders an opportunity to join the established uptrend at value," he added.
The euro was last up 0.2 percent at $1.3080, rebounding from a three-week low of $1.2997, according to Reuters data.
Against the yen, the euro rallied 1.3 percent to 115.15.
The Fed said in December it would keep interest rates near zero until the unemployment rate falls to 6.5 percent for as long as estimates of medium-run inflation do not exceed 2.5 percent.
"The most important point is that the latest unemployment rate data has been broadly steady for four months now, so even with decent employment growth no downward progress has been made on the unemployment rate," said Alan Ruskin, head of G10 FX strategy at Deutsche Bank in New York.
The data "will if anything push out the date for an end to QE, represents solidly risk-positive numbers and will lead to some minor squeeze on recent U.S. dollar longs."
The dollar typically weakens when investors increase risk exposure by buying higher-yielding and growth-linked currencies such as the euro and Australian dollar, and gains when investors are risk-averse and seeking safe havens.
Some analysts expect the safe-haven dollar will strengthen in the coming weeks as investors increasingly focus on more political wrangling in Washington on budget issues, including further spending cuts and the federal debt ceiling.
But analysts cautioned that the uncertainty on the U.S. fiscal front will hurt business investment and economic growth. That means the Fed will have to keep its monetary stimulus for longer, which will hurt the dollar.
Separate data showed the vast U.S. services sector in December grew at its fastest clip in 10 months.